YUM! Is Far From Appetizing

NEW YORK (TheStreet) -- There are a lot of lessons to be learned from the craziness going on in the market right now. We're going to take a look at the facts as they present themselves at the current moment.

We are finally starting to see some of the leading stocks begin to roll over a bit as are now in earnings season.

Last week was the start of earnings season. Several big companies reported earnings: Alcoa ( AA), YUM! Brands ( YUM), JPMorgan Chase ( JPM) and Wells Fargo ( WFC) were the biggest ones.

So I thought this would be a good time to analyze the company that deals with the four food groups here in America: fried chicken, pizza, root beer and tacos -- don't tell me you never eat this stuff! We're talking about YUM!, the owner of KFC, Pizza Hut, Taco Bell, Long John Silver, A&W, etc.

Data from Best Stocks Now App

Analysts were expecting this quarter's earnings to be 93 cents per share on the stock. Well, YUM! reported last week and they fell short. Am I surprised? No, and here's why.

My "Best Stocks Now" app requires that a stock first is a superior performer in the long term, intermediate term and short term. No laggards allowed!

Second, the stock must makes sense from a valuation point of view. In other words, there has to be justification for the stock going considerably higher over the next three to five years, no exceptions.

Third, a stock has to have a healthy, vibrant stock chart. None of this sideways or sloping downward business (this is why I never bought Apple ( AAPL) all the way down from $705 down to $385).

Now let's look at the analysis I did of YUM! Brands recently before it reported earnings last week, so you can see why I am not surprised that YUM fell short.

Data from Best Stocks Now App

Performance: How has the stock performed over the years? Well, not too bad; YUM! happens to be one of the better-run franchises around. Over the past 10 years YUM! has been doubling your money about every four years. That's an average of almost 18% returns -- this is pretty good.

Over the last five years YUM has delivered 22% per year. This has handily beat the returns of the S&P 500 during that same period of time.

Over the past three years it has delivered an average of 14.5% per year. This barely beats the average market return of 13.5% per year. This stock has become more and more of an average stock recently as it gets bigger in size.

When I compare the long-term and intermediate-term returns of YUM and compare it against the other 3,569 stocks that I track, it gets a performance grade of B+.

Here's my biggest problem with the stock lately, however. YUM has severely underperformed the market over the last 12 months. Look at the numbers for yourself.

YUM's momentum has been terrible. It has badly unperformed the market over the last year. In fact, the stock is down 2.3% over the last 12 months while the market is up 18.9%. So it gets a momentum grade of D-.

Valuation: Maybe a very attractive valuation on the shares can save the day?

Data from Best Stocks Now App

The shares are currently trading at 18.5 times forward earnings with an expected five-year annual growth rate of 11%. The shares are trading at a fairly large premium to its growth rate. This shows up in the PEG ratio of 1.66.

When I extrapolate out the current earnings estimates over the next five years and apply a reasonable multiple, I do come up with a fairly attractive five-year target price -- but I require performance and value. YUM falls flat on its performance.

Stock Chart: Lastly, as a professional money manager, I require a vibrant and healthy stock chart.

Courtesy of StockCharts.com

This is about as dull of a technical pattern as you can find in this current BULL MARKET. Why would I want to have my money tied up in this dud when large-cap stock like EOG Resources ( EOG), Netflix ( NFLX), Priceline.com ( PCLN), etc. are breaking out all over the place?

The bottom line is this: YUM! Brands was dead money before it reported earnings. Now it is really dead money.

Here is another point that I would like to make. I hear some investors say "Don't get sore, buy some more." This is averaging down -- it is a cardinal sin in my book to buy more of a stock that just reported bad news.

When a stock or a company has lost the momentum that has been driving it higher, it's very difficult to get it back -- and if it doesn't have it, you want to avoid the stock.

So let's recap.

YUM has good performance in the long term but not in the short term. The valuation of YUM is an A-, which isn't too bad, but it also has a high PEG ratio that I do not like. Third, I do not like YUM's stock chart at all.

Out of the 3,570 stocks in my database, YUM comes in at 1,510. Let's focus on the top 200 to 300 and leave the duds alone. This continues to be a raging bull market that has taken the S&P 500 from 660 to 1700.

This bull will not last forever, however. It is important to take advantage of the stocks that are working in this current market and leave alone the ones that are not.

Data from Best Stocks Now App

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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